Failing Health Care Co-ops Will Cost Taxpayers

Consumer Operated and Oriented Plan Programs (COOPs) were really a political compromise between Members of Congress who wanted a public plan option and those who didn’t. Once the Affordable Care Act passed, COOPs had outlived their usefulness. However, they are now failing and will cost taxpayers plenty. Senior Fellow Devon Herrick testified before a congressional committee.

Technology's Role: Driving Down Costs

Why have Americans had to wait until the tail end of the 20th century for mass customization? The simplest answer: until now, the country didn't have the know-how to customize at low cost. Today's technology, though, makes it possible.

"The signature tool of mass customization is the microprocessor."

Revolution Via Microprocessor. If there's a signature tool of mass customization, it's the microprocessor. This tiny device is indispensable to many of today's "smart" tools - most notably, powerful computers that process, store and send information. The Internet moves vast amounts of information at the click of a button - not just words and numbers but pictures and sound as well. Search engines - software that brings order to the Internet's chaos - are key to customizing because they find and organize information based on users' profiles and inquiries. Lasers are used in bar-code scanners, measurement devices and fiber-optic cables that can transmit whole libraries in seconds. Artificial intelligence programs simplify the design of new products. Computer-controlled manufacturing makes it faster and cheaper to modify designs and assemble one-of-a-kind items. Breakthroughs in biotechnology are unlocking the secrets of individual cells. The leap from analog to digital greatly expands the capacity of all kinds of communications technologies to process and deliver that most precious of commodities - information.

The tools of the Information Age are indeed powerful. These technologies spawn mass customization by revolutionizing the calculus of production costs. Nearly all business expenses fall into two broad categories - fixed and marginal. Fixed costs include conceiving, designing and organizing the operation, setting up plants, installing equipment, bringing in utilities, hiring workers and slogging through the usual morass of red tape. These costs are incurred before the first sale is made. Marginal costs, on the other hand, aren't incurred until an enterprise is up and running. They cover expenses for producing additional units of output, including wages, raw materials, electricity, marketing and distribution.

The interplay of fixed and marginal costs explains both mass production and mass customization. In the Industrial Age, electric motors, engines, winches, conveyor belts, machine tools and other advances reshaped the economy. They were the high technology of the times. These innovations allowed companies to turn out identical products cheaply. The order of the day was standardization - from nuts and bolts to accounting procedures and time zones. The world of mass production usually involved high fixed costs and low marginal costs. Producers made money by cranking out as many units as possible, driving down the average production cost by spreading the huge fixed cost over more and more units. That's precisely what Henry Ford and his successors did. Customers paid lower prices for automobiles, appliances, clothing and household goods, but companies could only bring a limited number of standardized models to the marketplace. With high fixed costs and low marginal costs, it's cheap to make the same product for everybody but expensive to produce a different product for each customer.

Industrial Age technology replaced muscle power with machine power, which ran the assembly lines. Information Age technology complements machine power with brain power, enabling us to recognize each consumer's preferences and deliver what they want at a reasonable price. Once again, the key is costs. Mass customization becomes optimal when both fixed and marginal costs - particularly fixed - are low. If producers can change designs quickly and inexpensively, they'll win customers by targeting individual tastes and preferences. Average costs decline even without long production runs, permitting low prices along with the bonus of getting exactly what we want.

From Mass Production to Mass Customization. Mass production was the by-product of Industrial Age tools. Mass customization is the dividend of Information Age tools.

"Modern technologies slash fixed costs in information, production and distribution."

Modern technologies slash fixed costs in three areas: information, production and distribution. By making it easy to supply information, the Internet gives consumers a cheap and easy way to find out what goods and services are on the market. Companies can display immense amounts of product information on their web pages and take orders from anywhere in the world. More important, the Internet frees producers from the expensive proposition of paying firms to gather information on what buyers want. They now find out electronically, at negligible cost. Both InterActive Custom Clothes, the jeans maker, and CDuctive, the producer of custom compact discs, compile consumers' preferences through the Internet. Amazon.com, the Internet bookseller, keeps track of readers' purchases, allowing the online vendor to recommend specific books to individual customers.14

"The Motorola factory could produce 29 million different pagers on the same line without retooling."

By making it cheaper to personalize during production, Information Age tools remove the last barriers to providing goods and services for individual customers. It's smart automation that allows CDuctive to personalize compact discs at the click of a button. Once an order arrives, computers retrieve the selections from a hard drive and burn them directly onto blank discs. InterActive Custom Clothes uses computerized fabric cutters that are quick, precise and inexpensive. Even assembly lines are no longer limited to endless iterations of the same product. Computer-aided designs are replacing costly prototypes. Computer-guided machinery allows production to shift from one style to another with a few lines of computer code. At Motorola's pager factory in Boynton Beach, FLA., the specifications for each order arrive in a direct transmission from sales representatives' laptop computers.15 Within minutes, these specs are translated into bar-code instructions for the assembly process. In theory, the factory could produce 29 million different pagers on the same line, one right after another, without the time and expense of retooling.

Improvements in distribution, made possible by such technologies as lasers and computers, reduce the fixed costs of getting products to consumers. Bar-code scanners allow Federal Express and other overnight shippers to improve speed and accuracy while reducing outlays for a global system to pick up, sort, track and deliver packages. As the Internet spreads into more homes and businesses, it makes the delivery of information products relatively inexpensive. What does it cost NewsEdge Corp. to personalize news reports? Next to nothing. Fidelity Investments and other brokerages offer web sites that allow investors to track their portfolios in real time. DirecTV, capitalizing on the increased capacity of satellite television systems, incurs no added expense by offering the entire National Football League schedule every Sunday, so sports fans can choose which games they want to watch.

"The globalization of commerce also has contributed to thrusting the economy toward mass customization."

Michael Dell started his $16 billion computer business in a University of Texas dorm room in 1983 on the basis of low fixed cost. Dell's masterstroke: build to order and do it quickly. Customization would lose its value if customers had to wait months for their computers. The Internet allows Dell to find out what each customer wants, instantly and cheaply. Continuous-flow manufacturing cuts the cost of customizing: 35 cargo doors line both ends of Dell's new Round Rock manufacturing facility. On one side, suppliers deliver components throughout the day. On the other, workers load finished products onto trucks. Actual assembly takes five minutes. Even adding time for loading software and testing for quality, the whole process takes just four hours. By economizing on spare parts, product inventory, delivery and every other step of the process, the company provides a customized product at a competitive price. No wonder Michael Dell has been lauded as the Henry Ford of mass customization.

Information Age technology thrusts our economy toward mass customization, but other factors also contribute. The globalization of commerce, for example, makes goods and services more widely available, especially as cutting-edge electronic media reduce the time and expense involved in gathering information. Access to products from around the world also makes us more sophisticated consumers, so that even in the home market we demand the nuances of Italian suits or German beer.

Wealth and Customization. Just as mass customization couldn't take root in an isolated society, it couldn't emerge in a poor one. Low-income countries are still dominated by mass production. That's to be expected, because producing quantity is the quickest way out of poverty. Once a nation becomes wealthy, most families' basic needs are satisfied. As they move up the economic ladder, consumers typically move down a list of wants from food, clothing and shelter to luxuries. All of us desire the luxury of goods and services that embody our own tastes and preferences. It's money in the pocket, though, that makes it possible. We're becoming a society of mass customization because we can now afford it.

First we meet basic needs through mass production. Then we gratify individual wants through mass customization.